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Turkish Lira Weakens As Investors Weigh Monetary Policy, Poor Economic Data

September 2, 2020 at 19:44 by Andrew Moran

Closeup of the Turkish 20-lira noteThe Turkish lira is continuing its downward trend against the US dollar midweek as investors start to weigh the central bank’s policies. The lira faced additional pressure on weakening economic data, including the second-quarter gross domestic product and manufacturing numbers.

According to the Istanbul Chamber of Industry Turkey, the manufacturing purchasing managers’ index (PMI) fell to 54.3 in August, down from 56.9 in July – anything above 50 indicates expansion. Despite falling from its best reading since February 2011, the PMI enjoyed its third consecutive month advancing manufacturing activity. Consumer demand, output, new orders, employment, and buying activity improved in July. But a depreciating lira accelerated input costs and output prices.

In the second quarter, the Turkish economy contracted at an annualized rate of 9.9%, down from a revised growth rate of 4.4% in the first quarter. The market had forecast a gross domestic product (GDP) plunge of 11.8%. This was the steepest contraction since the January-to-March period of 2019.

Within the GDP numbers, household consumption, government spending, fixed investment, and trade declined during the three months ending in June.

In July, the country’s trade deficit narrowed to $2.68 billion, down from $3.29 billion at the same time a year ago. Exports fell 5.8% to $15 billion, while imports tumbled 7.9% to $17.7 billion. Its biggest industries experienced weakness: manufacturing, mining, agriculture, fishing, forestry, and capital goods.

On Thursday, the consumer price index, the producer price index, and foreign exchange reserves data will be released.

Analysts are looking at the central bank’s recent backdoor tightening campaign, including funding the market at a higher rate than the benchmark 8.25%. In recent weeks, weighted average cost funding increased to 10.15%, despite the traditional repo auctions sliding to 10%, from 11.41% last week. Unless the overnight market funding rate was reduced from 9.75%, the banking industry forecasts the average funding cost to range between 10% and 10.5%.

Last month, the Turkish lira crashed to an all-time low of 7.41 against the US dollar, bringing its year-to-date crash to more than 20%. After a couple of weeks of rebounding, the lira might be testing fresh lows in September as the country’s foreign reserves run dry. This year, policymakers have spent tens of billions of dollars propping up the lira.

The USD/TRY currency pair rose 0.24% to 7.3868, from an opening of 7.3691, at 19:34 GMT on Wednesday. The EUR/TRY decreased 0.37% to 8.7471, from an opening of 8.7779.

If you have any questions, comments, or opinions regarding the Turkish Lira, feel free to post them using the commentary form below.

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